America’s economy is looking better and better with each passing day. Not only is the housing market contributing to growth, but corporations are flushed with cash and consumers are steadily paying down their debts. Moreover, the net exports are meaningfully improving because of the energy renaissance in North Dakota and Pennsylvania. GDP (gross domestic product, the measurement of everyone’s income all combined) could rise at a 3 percent rate in the first quarter as a result. If such a growth rate can be sustained for the remainder of the year, then it would mark the first “field goal” success for President Obama. Historically, GDP in America grows at 3 percent a year – the reason for using the 3-point field goal analogy. President Bush kicked two field goals in his eight years, while President Obama has yet to make one to date.
Crawling out of a deep recession is not going to be easy because of the financial market collapse. Generally the deleveraging process of consumers needing to save more and banks needing to rebuild capital (by lending less) take years to complete. This transitional phase means less money circulating through the economy. But the deleveraging process could soon be ending. Re-leveraging of borrowing more to spending more could be in store to provide that extra kick to the economy.
The consumer credit card debt has fallen meaningfully in recent years. Part of the reason was due to banks lowering the credit card debt limit amount, which automatically forced consumers to borrow less. Interestingly, credit card delinquency rates have been tumbling down, far faster than mortgage delinquency rates. Consumers evidently never want to lose the plastic card, though are willing to lose the house. Or maybe only the homeowners in Illinois, New Jersey, New York, and other judicial foreclosure states, where not paying a mortgage does not mean getting kicked-out of a home for at least a couple of years, are keenly focused on keeping credit card payments current, though at the expense of a much slower housing market recovery in these states.
Mortgage debt levels have also significantly fallen. More cash purchases in recent years and refinancing into lower interest rates have helped. A discharge of a certain portion of the mortgage debt via foreclosures and short-sales also has lowered the overall debt load. As a result, a typical homeowner debt servicing obligation has fallen to the lowest level in at least a decade.
Meanwhile, financial institutions are flushed with cash. Their quarterly financial books show solid profit increases due in part to the pristine nature of mortgages that were originated in the past 4 years. Rising home prices have drastically cut mortgage delinquencies of recent vintages. The combination of piles of cash and exceptionally low delinquency rates on recently originated mortgages should begin to open up more lending opportunities.
But not every debt segment is improving. The U.S. government debt is on the verge of getting out of control. Furthermore, the student debt situation is worsening. Therefore, the first-time homebuyer market is likely to be hampered in upcoming years. Perhaps colleges are not teaching the right skills that students need for the modern economy. Or perhaps today’s students are interested in going to college (to party) but not as interested in learning as evidenced by a growing number of 5th and 6th year undergraduate students. Maybe it is the slow economy that is not growing fast enough to absorb many of the bright college students. Small businesses, for example, have noted in the latest Federal Reserve Beige Book, that fewer planned staffing from the confusing and burdensome compliance cost associated with the Affordable Care Act that will go into effect from next year. Unfortunately, young adults look to be strapped for hard times ahead.
The rising student debt load should have policy implications. Before automatically falling in love with the idea that more college students are good for society, we should look hard at what works and what doesn’t. A look back at two past great revolutionary educational achievements may provide clues about the right public policy. Kindergarten was introduced in Germany speaking regions in the 19th century with the belief that earlier the start the better the outcome. Germany at the time was not even a country, but a glob of hundreds of different principalities speaking a common language but with no single national cohesion. But after a national unity orchestrated by Bismarck and better educated workforce, Germany experienced an economic miracle (and unfortunately, a military rise). To this day a phrase like precision German engineering carries a very strong image.
Another educational revolution occurred in the distant reaches of the Soviet Union. In places like Uzbekistan and Kirgizia, the literacy rate had been less than 5 percent not too long ago. It was normal for women to have 10 or so children during that era. But the introduction of the Russian language and forced schooling raised literacy rates to over 99 percent in few short years. After acquiring education, women were having only 3 or 4 children as they wanted to spend more time reading about the happy and unhappy families in novels like Anna Karenina. All good for the mind. The eventual collapse of the state-run economy eviscerated people’s lifetime savings, both for men and women.
The lesson appears to be that promoting education just for education sake is insufficient. The education must provide skill sets necessary for an ever-changing dynamic economy. Only from having a secure job and rising income will it permit people the leisure time to read great books.